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Groups and Wisdom III

January 20, 2007Posted by Jay Livingston

James Surowiecki argues for the “wisdom of crowds.” The average of the guesses of a lot of interested people will be closer to the right answer than will the guess of the smartest individual. If you want to get the answer to something, let them all bet on it and then watch where the money pushes the market.

The “wisdom of crowds” runs smack up against another concept in betting— the “smart money” — the conventional idea that some bettors are consistently more astute, while others are “punching bags.” After all, if the crowd, the majority of bettors, were usually right, they would long ago have driven the bookmakers out of business.

Ideally of course, a sports book makes money on the “vig,” the 10% surcharge on losing bets. (When you bet on a football game, you put up $11 to win $10. The point spread supposedly makes both sides equally attractive. If the bookie has the same amount bet on each side — say $1100 on the Bears and $1100 on the Saints —he’s guaranteed to make $100, collecting $1100 from the losers but paying out only $1000 to the winners.)

Sociologist Ray D’Angelo, who has studied bookies, says that yes, it’s the vig that the bookies count on. That plus a few out-of-control gamblers. But how often do the bets on the two sides of a game balance out? And what happens if they don’t?

One thing bookmakers do to correct an imbalance in betting is to change the point spread.. By watching changes in the point spread, you can often tell which team the crowd likes. For example, in last week’s Bears-Seahawks game, the original line suggested to Las Vegas casinos was Bears minus 7. But bettors loved the Bears, and the line quickly changed to 8. Even that didn’t deter Bear bettors or attract enough Seahawks money. Oddsmakers continued to move the line up to 8 ½ and even 9. In the end, the crowd was not wise. The Bears won, 27-24, but their bettors, who gave up a lot more than three points, lost.

This week it’s the Saints and the Bears (not, as I nearly typed from force of habit, the Saints and the Roughnecks). And apparently the crowd likes the Saints. They opened as three-point underdogs. But today, some books have cut the line 2 ½ or 2, and one big book (Bodog.com) is giving Saints bettors only 1 ½ points. The one Website that allows you to see the number of bets confirms this crowd preference: twice as many people have taken the Saints.

So do we follow the crowd? Or should we be “contrarians” and bet against the crowd? The contrarian view says that the bookies stay in business by being smarter than the public. Bookmakers probably also subscribe to the smart money view. That’s why Ray D’Angelo’s small-time bookmakers didn’t worry about bets from “out of control” gamblers. Those bettors were definitely not smart money.

But some bettors are. I once heard an interview with a man who sets the line for one of the big Las Vegas casinos. He said he might not be worried by a lot of money from the general public coming in on one side. But there are particular sports bettors whose opinion he respected so much that even a relatively small bet from one of them would cause him to move the line.

My guess is that in tomorrow’s game, it’s the sheer volume of money on the Saints, not the bets of a few experts, that has pushed the line down. In any case, if you’re a contrarian, you’ll go with the Bears (also if you’re a Chicagoan, but that’s a different matter). If you believe in the wisdom of crowds, you’ll bet the Saints.

There’s one more risk in going with the crowd when their betting has moved the line — the worst-case scenario: You call up your bookie on Sunday and find that all the money coming in on the Saints has driven down the line. Instead of getting three points, the line is 2 ½. You figure, hey, it’s only a half-point, a minor consideration far outweighed by the wisdom of the crowd. You take the Saints and settle in to watch the game. It’s a close one, tied for much of the fourth quarter, right up until the final seconds, when the Bears kick a field goal to win 24-21. If you had been able to get the three points, you'd have a push. But the crowd pushed the line down to 2 ½, leaving you a half point short, and you hurl your copy of The Wisdom of Crowds through the TV screen.

UPDATE: The Bears won 39-14. The bookies cleaned up, and the crowd was left to reconsider its collective wisdom.